New rules mean banking industry will digitally clear checks quicker

Kevin Rademacher

Thursday, Oct. 7, 2004 | 11:17 a.m.

The Federal Deposit Insurance Corp. has issued a warning for consumers in the face of changing technology in the banking industry.

The FDIC cautions that provisions in the Check Clearing for the 21st Century Act -- also known as Check 21 -- could lead to an increase in bounced checks.

The new rules, which go into effect Oct. 28, require banks to process "substitute checks" from electronic images of original checks. With that, checks can be transmitted electronically and are ultimately expected to clear quicker.

"That means you need to have enough money in your account when you write a check or run the risk of having checks bounce," an FDIC statement said.

The FDIC also points out that bounced checks can be expensive, typically incurring late fees and charges of $15 to $30.

In response, banks are working to educate consumers about the changes.

Both Bank of America and Wells Fargo Bank have been providing literature to customers, educating them about the new measures. In addition to a loss of "float" in consumer accounts, other changes will be evident. Chief among them, customers who have their canceled checks returned will soon receive only a copy of the check.

"We have tried to educate customers what (Check 21) is and what it does," said George Smith, president of Bank of America's Nevada operations. "In the long-term, it's a good deal."

Bankers pointed out that many consumers are used to the rapid charges to their accounts through the widespread use of debit cards.

Janet Kincaid, senior consumer affairs officer with the FDIC, said it might be a good time to investigate participating in overdraft protection programs offered by most banks. The cost for coverage under those programs and their maximum coverage limits vary from bank to bank, Kincaid said.

"It's really important to remember that this service is essentially a loan, so there can be interest charges and other fees," she said.

The faster processing also means that there will be a much smaller window for consumers to issue "stop payment" orders on checks that already have been written.

The national advocacy group Consumers Union has sharply criticized Check 21, claiming that the lack of original checks could make it more difficult for consumers to rectify discrepancies.

The group also expressed concern that while the new rules are expected to limit the time in which its takes for check to clear, no such provisions are in place to decrease the time it takes deposits to post.

Kirk Clausen, president of Wells Fargo's Nevada operations, said that the bank's system is to process deposits each day before posting debits to accounts.

Clausen also pointed out that the Check 21 legislation was a Congressional mandate, not a measure sought by the banking industry.

"Unfortunately, some of the consumer groups are under a false impression," he said. "This is legislation we didn't ask for."

While banks said there could be some adjustments consumers need to make in managing their accounts, there will be benefits, such as an additional measure against check fraud.

With checks posting faster, there is a smaller window for those committing fraud to operate without being detected.

"The bad guys understand float," Clausen said.

While Check 21 goes into effect this month, the overall conversion is expected to take time. On Oct. 28, just one half of the overall Check 21 equation will be in place. On that day, banks must be prepared to receive the digital images of the checks and process transactions from those images. No banks, however, will yet be required to transmit those images instead of the paper checks.

"Personally, I think its going to be evolutionary, not revolutionary," Smith said.

Larry Charlton, chief operating officer for Business Bank of Nevada, said his bank would move into the Check 21 arena cautiously. While Business Bank will be ready to receive the digital images, Charlton said they would not immediately begin transmitting checks.

"I'm not going to start it on the first day," he said. "But we're fully capable of turning it on if we have to."

There are also likely to be some issues that will need to be worked out once the process is up and running, such as who takes responsibility for bad checks under the new system -- the bank that accepts the bad check, the issuing bank or the consumers.

"There's some issues that will evolve out of this that one of these days may get litigated," Charlton said.

After all, he explained, changing a long-standing method of moving money around the country couldn't possibly be easy.

"We've been doing this whole paper check ... thing since the 1950s," he said. "This evolution was bound to come eventually."

At the same time the new rules go into place, the use of paper checks is falling dramatically. A recent FDIC study said that in 1995, U.S. banks paid 49.5 billion checks. By 2000, that number had fallen to 42.5 billion.

During the same time, the number of electronic payments (such as automatic bill paying and Internet banking transactions) and debit card transactions, surged from 18.9 billion to 42.8 billion.